The dollar dipped against a basket of major currencies on Friday, extending the previous day's steep losses on concerns over the U.S. economic recovery and before the all-important June non-farm payrolls data. By 1047 GMT, the dollar index .DXY, a gauge of its performance against six other major currencies, slipped 0.2 percent to 84.539, near a two-month low after it shed 1.6 percent on Thursday.
The U.S. currency hit its lowest level this year against the Japanese yen on Thursday, below 87 yen, as market players covered short cross yen positions.
We are at a phase at the moment when the dollar reacts negatively to poor U.S. data, which we have quite a lot recently, said Tom Levinson, currency strategist at ING in London.
He said the dollar would come under pressure if the jobs report, due at 1230 GMT, came below market consensus and the euro would rise to $1.260/65.
ING expected a fall in June non-farm payrolls of 250,000, though economists polled by Reuters expected a decline of 110,000. It would be the first drop this year but mainly due to the disappearance of temporary federal census-taking jobs.
The Reuters survey showed private-sector hiring is forecast to rise to 112,000, up from 41,000 in May, with the unemployment rate inching up to 9.8 percent from 9.7 percent the previous month.
The greenback steadied at 87.63 yen after hitting a seven-month low of 86.96 yen JPY=. Japanese exporter offers were likely to emerge in the low 88 yen range, a dealer at a Japanese bank said.
TOO MUCH PESSIMISM?
Market consensus is now looking for a relatively weaker number, and therefore the risks may be somewhat asymmetric to the upside, BNP Paribas said in a note.
However, any rebound is likely to be limited to the 89 (yen) level amid continued exporter selling interest and the still-weak risk sentiment.
One-month implied volatility for dollar/yen pulled back to around 12.50/13.10 JPYVOL from around 14 percent on Thursday. Option triggers were seen below 85 yen, traders said.
The dollar hit a 14-year low of 84.82 yen last November.
The euro surged more than 2 percent on Thursday to $1.2541 in its biggest one-day advance since mid-March last year. On Friday, it was holding around $1.2511 EUR=, with options with a strike price at $1.2500 set to expire later in the day.
Easing concerns about euro zone liquidity problems after a lower take-up of European Central Bank funding and successful bond auctions on Thursday prompted players to cover short euro positions.
However, analysts remained downbeat on the single currency ahead of European bank stress test results and a Greek T-bill issue due later this month.
The Australian dollar AUD=D4 jumped to as high as $0.8510, from around $0.8428, and also rose against the yen after the Australian government agreed to a watered-down version of a proposed mining tax, easing concerns the tax would hurt business investment.
(Graphics by Scott Barber; Editing by Susan Fenton)